Question

Luzadis Company makes furniture using the latest automated technology. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of machine-hours. The predetermined overhead rate was based on a cost formula that estimates $680,000 of total manufacturing overhead for an estimated activity level of 85,000 machine-hours.

During the year, a large quantity of furniture on the market resulted in cutting back production and a buildup of furniture in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year:

Machine-hours		76,000
Manufacturing overhead cost	$	637,000
Inventories at year-end:
Raw materials	$	20,000
Work in process (includes overhead applied of $36,480)	$	115,800
Finished goods (includes overhead applied of $91,200)	$	289,500
Cost of goods sold (includes overhead applied of $480,320)	$	1,524,700

Required:

1. Compute the underapplied or overapplied overhead.

2. Assume that the company closes any underapplied or overapplied overhead to Cost of Goods Sold. Prepare the appropriate journal entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

3. Assume that the company allocates any underapplied or over appliedoverhead proportionally to Work in Process, Finished Goods, and Cost of Goods Sold. Prepare the appropriate journal entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

4. How much higher or lower will net operating income be if the underapplied or overapplied overhead is allocated to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to Cost of Goods Sold?

Answer 1

Answer 1
Computation of underapplied or overapplied overhead
Applied Overheads [76000 actual machine hours * $8 per machine hour]				$608,000.00
Less : Actual manufacturing overheads				$637,000.00
Under-applied Overheads				$29,000.00
Working
Calculation of predetermined overhead rate
Predetermined overhead rate = Estimated total manufacturing overhead / Estimated machine hours
Predetermined overhead rate = $680000 / 85000 machine hours = $8 per machine hour
Answer 2
Journal entry to close underapplied overhead to cost of goods sold
Account Titles	Debit	Credit
Cost of goods sold	$29,000.00
Manufacturing Overheads		$29,000.00
Answer 3
Journal entry to close underapplied overhead to WIP,FG and COGS
Account Titles	Debit	Credit
Work in process Inventory	$1,740.00
Finished Goods Inventory	$4,350.00
Cost of Goods sold	$22,910.00
Manufacturing Overheads		$29,000.00
Working
Calculation of proportion of allocation of underapplied overheads to WIP,FG and COGS
Proportion of allocation of underapplied overheads to WIP = $36480 / $608000 = 6%
Proportion of allocation of underapplied overheads to FG = $91200 / $608000 = 15%
Proportion of allocation of underapplied overheads to COGS = $480320 / $608000 = 79%
Answer 4
Calculation of impact on net operating income if the underapplied or overapplied overhead is allocated
to Work in Process, Finished Goods, and Cost of Goods Sold rather than being closed to Cost of Goods Sold
Total Cost of goods sold will be if underapplied overheads allocated to COGS only =						$1,553,700.00
Total Cost of goods sold will be if underapplied overheads allocated to WIP,FG and COGS =						$1,547,610.00
Net operating Income will be higher by						$6,090.00